Delaware Litigation Lawyer & Attorney : Francis G. X. Pileggi : Corporate, Business, Commercial, Delaware Chancery Court

Prof. Larry Ribstein has a thoughtful post on a recent Chancery decision discussing the enforceability of a contract that allows misrepresentations. Abry Partners V, L.P. v. F & W Acquisition LLC, 2006 WL 358236 (Del. Ch. 2/14/06), download file. Here is the link to Larry's post:
Ideoblog: Should a court enforce a contract that permits lying?
The above opinion has a good analysis of integration clauses and how they interface with claims of fraud, as well as the need for a clear anti-reliance clause (see page 46 and cite to Kronenberg, 872 A.2d. 568 (Del. Ch. 2004)). Also included are helpful discussions on the comparison of fraud as a tort as opposed to fraud as a contract defense. (See footnote 26). Footnote 46 has a discussion of basis for a claim of fraudulent inducement. Also referred to is 6 Del. C. Section 2708 which allows parties to choose Delaware as the governing law in a contract.

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With a tip of the hat to Prof. Bainbridge for referring to it, the blog Sneaking Suspicions cites to a recent letter opinion by Chancellor Chandler in a unique way. Here is the link:
a02122506. The case is In Re Serena Software Shareholder Litigation. The case involved 2 concurrently filed shareholder suits, one in California and one in Delaware. The California case settled (or was subject to a Memo of Understanding to settle), but the Delaware plaintiffs wanted to proceed. The Chancellor allowed expedited proceedings but said that he would not be pleased if he later determined that the claims should have been covered in the other settlement. The author of the blog traced that phrase to a passage in the Old Testament. The link above provides a connection to the decision and the alleged Biblical reference. Whether or not it is true, it makes for interesting reading.

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For a good source on the intersection of technology and legal ethics, check Ben Cowgill's recent post, with his promise of more to come on the topic. Here is the link:
'Ben Cowgill on Legal Ethics'

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In comprehensively explained factual detail and after careful legal analysis, the Chancery Court ruled recently that the right to exercise stock options was waived due to a missed deadline (after which the options expired). One cannot fully appreciate the compelling facts (a busy executive relied on statements by reliable persons but did not read the notices mailed to him), nor the nuances of the legal arguments addressed by the court(equity does have its limits), in this short blurb about the case, but the opinion is must reading for anyone trying to enforce deadlines and conditions in an agreement--despite the harsh result due to one party not complying with prerequisites in the contract (or claiming he was unaware of a deadline). Vague v. Bank One Corp, download file.

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Craig Williams posts on his blog May It Please The Court about the recent decision of Chancellor Chandler in the case of In Re Telecommunications Shareholder Litigation, download file. The 43-page decision, as revised on Jan. 10, 2006, addressed many issues, such as the "entire fairness" standard which must be proven by parties who are on both sides of a transaction instead of them enjoying the presumptions of the Business Judgment Rule. The court denied a Motion for Summary Judgment due to questions about a Special Committee's independence and whether it was fully informed. Craig Williams discusses the case in the context of the 1985 Delaware Supreme Court decision in Smith v. Van Gorkom, which is often credited with requiring fairness opinions, and a pending SEC Rule that addresses the issue. Here is the link:
Making Fairness Opinions Fair For Everyone | WLF | May it Please the Court Law Weblog.
Here are a few more details about the decision:
The case involved claims of nondisclosure in proxy statements made in connection with a merger. The court noted that Delaware follows the federal standard for determining materiality of admitted information, as described in TSC Industries v. Northway, 426 U.S. 438, 449 (1976); Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985). See also Orman v. Cullman, 794 A.2d 5, 35 (Del. Ch. 2002) (Information contained in document incorporated by reference was sufficiently disclosed). The court determined that the non-disclosure of the plan to reasonably compensate the members of the Special Committee could be material to the reasonable shareholder. The court reasoned that compensation of Special Committee members "that is contingent, ambiguous, or otherwise uncertain, raises a triable issue of material fact as to what each member anticipated in the event that the Special Committee approved the transaction, and whether such anticipated reward was significant to the reasonable shareholder." The court passed over, for the moment, the reasonableness of a $1 million payment for four meetings and the effect on the Special Committee member who might be influenced by such compensation which would be impacted by his opinion on approving the transaction. The court applied the entire fairness standard (and thus did not apply the presumption of the business judgment rule that the directors acted on an informed basis, in good faith and in the honest belief that the action was taken in the best interest of the company, because the challenged director stood on both sides of the transaction.) The court discussed the analysis that applies to determine the independence of directors.
Importantly, the court questioned the independence of the legal advisors of the Special Committee. See generally, Jedwab v. MGM Grand Hotels, Inc. , 509 A.2d 584, 598 (Del. Ch. 1986) (If a controlling shareholder for whatever reason (for example to avoid litigation) elects to sacrifice some part of the value of his stockholdings, the law will not direct him as to how that amount is to be distributed and to whom.)

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Kevin O'Keefe refers to a Wall Street Journal article
and discusses the impact of blogs by lawyers and law professors on the traditional law review. This is a topic that will arise more and more often. Many people have asked me about the interfacing of the 2 fora, and now I have a source to which I can refer them. Here is the link:
LexBlog Blog : Law blogs impacting law reviews : Wall Street Journal

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In DeLucca v. KKAT Management, LLC., download file, the Chancery Court granted both advancement and "fees on fees," in the context of a judgment on the pleadings under Rule 12(c). The decision was based on an interpretation of unambiguous contract provisions as a matter of law.
Unlike the typical corporate advancement case, the present dispute involved limited liability companies and an Operating Agreement that promised to indemnify so long as there was no "fraud, gross negligence or willful violation of the law." As to any claim that might give rise to indemnification, the KKAT Companies promised advancement.
KKAT attempted to impose a "corporate capacity" analysis on the agreements despite it absence from the contractual text. In sum, the court concluded that "this is yet another case in which defendants in an advancement case seek to escape the consequences of their own contractual freedom. Regretting the broad grant of mandatory advancement they forged on a clear day, they seek to have the judiciary ignore the plain language of their contracts and generate an after the fact judicial contract that reflects their current preference. But it is not the job of a court to relieve sophisticated parties of the burdens of contracts they wished they had drafted differently but in fact did not. Rather, it is the court's job to enforce the clear terms of contracts. Here, that duty requires that DeLucca's Motion for Judgment on the Pleadings as to an Entitlement to Advancement be granted." The court also awarded fees on fees.
The court also noted that parole evidence was neither helpful nor necessary and that the legal policy of the State strongly emphasizes contractual text as the overridingly important guide to contractual interpretation (citing Twin City Fire Ins. Co. v. Delaware Racing Ass'n, 840 A.2d 624, 628 (Del. 2003) ("under standard rules of contract interpretation, a court must determine the intent of the parties from the language of the contract")).

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The Wall Street Journal Blog posts, courtesy of Tom Kirkendall, about an exchange between the judge and lawyers in the Enron case involving Lay and Skilling. He quotes from the transcript which captures a discussion about how long cross-examination was expected to last during the next day at trial. It is an educational exchange for anyone interested in how at least one judge views cross-examination from a "trial-management" perspective.

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Noted corporate law expert, Prof. Steve Bainbridge, has a post worth reading about adult conversions to Catholicism, especially among prominent and learned members of other Christian faiths. Here is the link:
ProfessorBainbridge.com: Neuhaus and the Cradle

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In denying a motion to disqualify counsel based on a claim that the opposing attorney might be a witness in violation of Rule 3.7, the court viewed the motion as a tactical maneuver. The court focused on the procedural context as relevant to the nature of enforcement, but not the need to enforce the rule. The court found that the movant would not be prejudiced at this stage of the case, the opposing party would not receive an advantage, and disqualification could cause undue economic impact. The motion was denied without prejudice to renewing it at a later time. Benge v. Oak Grove Motor Court, Inc., download file.

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The following post from the Point of Law blog, that refers, at the end, to the AP's reporting of a recent speech by Justice Scalia to the AEI, supports my view (that I admit is not unique) that some of the MSM is not fair in their reporting about Justice Scalia. Here is the link:
| Media coverage of Scalia speech

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In preparing for an argument before the Delaware Supreme Court on an expedited appeal from the Court of Chancery, I have been reading about oral advocacy. As a humorous reference, one of my colleagues reminded me of the credibility gap of "Baghdad Bob" during the first Iraq War. Here is a video and audio link. Laughs are almost certain after viewing it. Let's just hope that Baghdad Bob was not a lawyer.

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In Izquierdo v. Sills, download file, the Chancery Court applied the contract interpretation principles of course of performance; course of dealings; and usage of the trade in aiding the analysis of the parties' intent. In this case the court also addressed the general rule that deadlines in contracts do not extend until the next business day, unlike the common approach in court rules.

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In Sears, Roebuck & Co. v. Midcap, download file, the Delaware Supreme Court determined that the trial court erred in giving the jury a missing-evidence adverse-inference jury instruction because it failed to initially determine that the defendant had intentionally or recklessly destroyed the relevant documents. The adverse instruction was based at least in part on the testimony by the defendant that the evidence at issue "could not be located."

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Ben Cowgill's blog (that he has recently renamed because he describes it as much more than a blog), focuses on legal ethics and contains many useful links to resources on legal ethics and related topics.

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In Libeau v. Fox, download file, the Delaware Supreme Court affirmed in part and reversed in part a Chancery Court decision that interpreted an agreement among three friends for co-ownership of a beach house. The Chancery Court ruled that the parties effectively agreed to waive their statutory right to a partition of the property and based on the record presented at trial, the trial court determined that the agreement would expire upon the death of the last of the three original owners. However, the Supreme Court determined that reformation of the agreement that expressed the intent of the parties did not extend to changing the form of ownership from a joint tenancy with a right of survivorship to a tenancy in common. The Supreme Court adopted the reasoning of the trial court in determining that one can waive partition rights without an explicit disclaimer.
Rather, such an agreement need only contain a procedure for the co-owners to sell their interest in a manner that is inconsistent with the later maintenance of a partition action.
Specifically, when a contract provides an exit mechanism that is subject to certain conditions and when the filing of a partition action would allow an exiting party to escape those conditions, the exiting party's decision to sign the contract constitutes a waiver of the statutory right of partition. Lastly, the court noted that such agreements are not inconsistent with public policy which allows for reasonable restrictions on the transferability of real property.

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In Midland Interiors, Inc. v. Burleigh, download file, the court applied Chancery Court Rule 37(b)(2)(C) to a long list of discovery abuses, such as repeatedly failing to appear for a deposition, as authorizing the court to impose a default judgment as a penalty, but in an act of mercy, the court gave the defendant, who was pro se, one last chance before rendering that punishment, in this case which sought to pierce the corporate veil to collect a judgment.
By comparison, in Jacobson v. Ronsdorf, download file, another case involving a pro se defendant, the Chancery Court did grant the penalty of a default judgment, after carefully listing a long history of abuses. Pursuant to Rule 37(b)(2)(C), the Court based its decision on repeated failures of the defendant to engage in good faith discovery and in light of multiple failures to comply with court orders. The Ronsdorf decision was recently upheld by the Delaware Supreme Court without an opinion.

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For those readers of this blog who are also bloggers themselves, you will want to read this post by Kevin O'Keefe of LexBlog:
Increasing blog readership : Five tips

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Prof. Bainbridge has a thoughtful post on the function of corporate boards. Here is the link:
The Many Functions of a Corporate Board

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Pursuant to Chancery Court Rule 23.1, the court granted a motion to dismiss for failure to plead with particularity the futility of pre-suit demand in this derivative action, or that such demand was excused. Stone v. Ritter.

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In his characteristically scholary fashion, Steve Jakubowski discusses a recent bankruptcy court decision and in the process covers references to the history of claims for fraudulent conveyances; the homestead exception under the new bankruptcy code, as well as the philosophy as it applies to judicial interpretation theory of the famous philosopher Ludwig Wittgenstein, as compared to Justice Antonin Scalia. Here is the link:
Bankruptcy Litigation Blog: Judge Markell Invokes Justice Antonin Scalia's Canons of Statutory Construction Over the Philosophical Theories of Ludwig Wittgenstein in Resolving the Judicial Debate Over How to Close BAPCPA's New "Mansion Loophole"

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In a discussion of who owns the corporation as an entity, Prof. Bainbridge refers to his prior writings to support the position that in light of its status as a fictitious creation, nobody owns corporate property in the conventional sense.
Here is the link:
Who Owns the Corporation? Nobody

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Prof. Ribstein has a thoughtful post concerning GM in the zone of insolvency and the need for independent directors, with citations to 2 Delaware cases that discuss independence.
Managing GM: The board

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Gordon Smith links to a court order that denied a motion to strike based on a motion for summary judgment being filed about 5 minutes after the court imposed deadline. Useful reading. Here is the link:
Conglomerate Blog: Business, Law, Economics & Society

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This articles discusses the conflict when the same attorney attempts to represent a shareholder and corporation.
Florida Appellate Court Allows Attorney to Represent Majority Shareholder But Not Corporation; The Bencher, January/February 2006

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Prof. Ribstein posts about legal ethics in the context of corporate governance issues:
Ideoblog: Boies, again

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The Chancery Court once again made clear that "advancement means advancement" and when a corporation provides for advancement of fees to officers and directors, as allowed by DGCL Section 145, there are virtually no defenses to non-payment. In Radiancy, Inc. v. Azar, et al., download file, the court emphasized this point by allowing pre-judgment interest on the amount not paid, as well as attorneys' fees for bringing the advancement claims, including a motion for summary judgment to pursue the advancement right. Though there were a few factual issues in the case regarding some discretionary advancement to employees who were not officers, certain claims were undoubtedly subject to mandatory advancement, and by awarding the attorneys' fees required to pursue the claims, plus interest, the court was again sending a clear message in these types of cases that denial of advancement rights will not be lightly countenanced.

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In Bally Total Fitness Holding Corp. v. Liberation Investments, LP. , download file, the U.S. District Court for the District of Delaware, in response to a request for preliminary injunction, entered an order that required plaintiff to provide a letter to defendants setting forth the disclosures it contended that defendants failed to make in violation of Sections 13(d) and 14(a) of the Securities Act of 1934 and which the plaintiff would pursue at a preliminary injunction hearing. The plaintiff complied with that order by sending a letter, and submitted a Revised Preliminary Proxy Statement in which they set forth verbatim all the allegations of insufficient disclosures that plaintiff had listed, and also included their responses to plaintiff's allegations. The court ruled that a preliminary injunctions based on a violation of a disclosure provision of the Securities Exchange Act of 1934 is precluded when defendant cures the alleged defects and disclosure because such a cure would eliminate the necessary showing of irreparable harm. In the context of a Motion for Preliminary Injunction, where there is a good faith dispute as to the facts or an alleged legal violation, disclosure of the dispute is sufficient to cure the alleged defects. The court determined therefore that a preliminary injunction proceeding would not be necessary.

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Prof. Bainbridge posts about a recent short article he wrote summarizing the Business Judgment Rule ("BJR") in light of oral argument last week in the Disney case before the Delaware Supreme Court, and a related New York Times article referring to the BJR as esoteric. In his short article, Prof. Bainbridge argues that the BJR should not be esoteric and he tries to summarize the rule in a way that should be understood by all directors.

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Prof. Bainbridge reports that Chancellor Chandler was a guest speaker today in the good professor's colloquium on corporate governance and the Chancellor was scheduled to discuss his recent Unisuper decision, recently blogged here, which may be a high-water mark in the ability of shareholders to restrict director behavior by contract.

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The Andrews Delaware Corporate Litigation Reporter, a publication of Thomson/West (and available on Westlaw), published in their current issue my summary of selected key 2005 Delaware Chancery Court and Delaware Supreme Court cases that appeared earlier on this blog, download file.

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The Delaware Supreme Court, in DCV Holdings, Inc. v. Conagra, Inc., download file, reviewed a trial court ruling on claims that the seller should be responsible for antitrust violations and other claims that arose after the closing, based on allegations of common law fraud, as well as the indemnification clause in the agreement of sale. The court reviewed the elements of common law fraud, which it found were not met, reviewed the terms of the contract, and relied on the basic principle of contract interpretation that the more specific parts of a contract prevail over more general language. The court found that the seller specifically negotiated for a "knowledge qualifier" that limited its liability for those matters which it was unaware of at the time of the sale, in connection with its indemnification obligations. In upholding the trial court, the Supreme Court reviewed the standard for review of factual determinations and also noted that its review of the trial court's application of law to factual determinations is de novo.

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Prof. Ribstein suggests that conflicting dicta in cases about the duties of directors in the zone of insolvency is less than clear, and he and a colleague have written a new article about the topic. A link to the article, and a summary of it are on his blog:Ideoblog: Directors' Duties in Failing Firms

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The Chicago Tribune reports today, download file, that " The computer-maker changed its bylaws to require that directors running in uncontested proxy voting elections must receive the approval of a majority of the shares entitled to vote in the election. An incumbent director who fails to clear that hurdle will be required to resign." Previous shareholder proposals to make this change were not successful. Perhaps this is an example of the power of perseverance.

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In Laties v. Wise, download file, Chancellor Chandler granted a motion to dismiss for failure to comply with the particularity requirements of Rule 23.1 that oblige a derivative plaintiff to explain in detail why pre-suit demand on the Board of Directors should be excused. In this case, the plaintiff brought a derivative claim for unjust enrichment, and against the directors for waste, based on allegations that they should have pursued a claim against the ex-CEO for unjust enrichment when his bonuses were paid based on profits that were later determined to have been losses according to restated financial statements. The court applied the test enunciated in Rales v. Blasland, 634 A.2d 927, 932 (Del. 1993), for evaluating a derivative action challenge of a board's failure to take action -- as opposed to challenging an actual decision of the board. The court found that there were no particularized actual allegations that would impugn the independence of the board or its ability to evaluate a demand in respect to either claim. Nor did the court find that the plaintiff established a substantial likelihood that the directors were subject to personal liability as opposed to a "mere threat." In addition, the plaintiff did not establish that the directors would not enjoy the protection of the Section 102(b)(7) provision in the Certificate of Incorporation, especially in light of the absence in the complaint of allegations of bad faith, intentional misconduct, knowing violation of the law or any other conduct for which the directors might be liable.

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I join with Larry Ribstein and Gordon Smith in welcoming to the blogosphere a new blog about the intersection of law, business, economics and finance, by Prof. Rich Booth. The name of his blog is The Quant.
Here is Gordon Smith's welcoming post:
Conglomerate Blog: Business, Law, Economics & Society

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This blog addresses the intersection of law and business. When business owners face religious issues in the workplace, and/or attempt to employ their religious beliefs in the workplace where others may not agree with their religious views, legal issues arise. Steve Bainbridge, a noted professor of corporate law, has a post on his blog that addresses the foregoing confluence of business and religion, and provides links to relevant source materials.

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